Article

Root Out Deficiencies

Over the past decade I’ve worked with dozens of nanobreweries in an operational audit capacity. Combining my public accounting audit background with my Six Sigma lean manufacturing training, I’ve custom tailored audits for breweries of all sizes. This allows me to pinpoint inaccuracies, inefficiencies, and omissions within each entity’s operations: From their financial statements and production flow to their communications strategy and company culture.

If opening a nano has been on your mind, I wanted to share with you some of the most common deficiencies I’ve seen over the years, reasons they’re deficiencies, and some preventive measures/suggested solutions before you have a chance to encounter them yourselves. My goal is that you’ll recognize the importance of planning, designing, and executing standard operating procedures (SOPs) consistently, and how so many of their elements are correlated to the entity’s eventual success (or failure). I’ll list the deficiency first in italics, explain why it’s a deficiency second, and then finish with suggestions to prevent/alleviate the deficiency. This follows the general format of most of my operational audits. Most of these lessons are from an owner’s perspective, and because the head brewer for a nano is often the same person, consider these positions interchangeable. Let’s get started.

Little production planning
In many cases I see, the planning window is only 1-3 weeks. This is not okay. Production planning allows the brewer to create a sales forecast for the year (broken down by quarter). Production efficiencies can be realized based on production plans, helping avoid such situations as overnight shipping fees or carrying high ingredient inventories. Production planning allows the brewer to aggregate raw materials orders for optimal pricing, to minimize the opportunity for raw materials shortages, and to handle yeast management and residence times more effectively. This can become a pain point for a team, resulting in a significant amount of frustration and flustered communication. 

Most of these lessons are from an owner’s perspective, and because the head brewer for a nano is often the same person, consider these positions interchangeable.

In many cases I see, the planning window is only 1–3 weeks. This is not okay. Production planning allows the brewer to create a sales forecast for the year (broken down by quarter). Production efficiencies can be realized based on production plans, helping avoid such situations as overnight shipping fees or carrying high ingredient inventories. Production planning allows the brewer to aggregate raw materials orders for optimal pricing, to minimize the opportunity for raw materials shortages, and to handle yeast management and residence times more effectively. This can become a pain point for a team, resulting in a significant amount of frustration and flustered communication. 

Build a production forecast for the upcoming 12 months with the head brewer. The brewer should negotiate raw materials pricing for this period based on expected order quantities. The brewer should calculate optimal order times and optimal reorder points for this lead time. After a quarter of running operations following production plans, implement, then integrate an inventory management system and allow the software to complete the planning for you. The key is to initiate a SOP first, then apply good practices to software operations. On the brewing side, calculate yield losses for the prior year then plan for a reduction in those yield losses for the upcoming 12 months. Create processes that would bring about those efficiencies. Finally, implement an annual budgeting process for the overall operation using a combination of a top-down and bottom-up approach, depending on the degree of transparency you are willing to share with anyone who is a part of your operation.

No regular purchase order process
This implies inventory is potentially received without being counted. The bill of lading and packing slip are essentially ignored. If (or when) the invoice arrives, it is input without regards to timing. The brewer or staff can order any amount or any type of ingredient they want or need without any sort of internal controls. Someone on staff could steal bags of grain or other materials for their personal use without being caught. Cost of goods could be stated improperly. There is no way to accurately cost out each run of beer. The brewery could be paying for incorrect inventory or be shorted inventory by the vendor without their knowledge. On the sales side, packaged product could be stolen without owners’ knowledge. Inventory could be shorted or over-allocated. In short, this lack of a single procedure can cost the brewery unknown amounts of money. 

When an order for inventory needs to be placed, assign it a purchase order number. The order should indicate quantity and price per unit. Once inventory arrives, match quantity to purchase-order quantity and indicate any shortages. Once the invoice arrives, match price to amount agreed upon in purchase order prior to in-putting into the financial system. Input inventory quantities into financial records as it arrives to ensure inventory quantities are correct and just-in-time. Brewer should have access to unit costs to allow for negotiations with suppliers. Brewer or owner should maintain a recipe costing template to track true beer costs per run until good practices are achieved and the software takes over that work calculation. See my “Crunching the COGS” column for more on this. Several of my nanobrewing clients have adapted the following SOPs with success. Note that this is an example only and other ones may exist.

Treat the taproom as a client of the brewery and create a sales order by the taproom at cost (price equals cost) to document the inventory transfer from one location to another. If the keg is a partial, indicate on the sales order an approximation of quantity of beer being transferred in the keg. On the taproom side, keep a board or paper at the bar by brand and package size. Every time a keg is changed out, mark a hash tag next to the brand/package size. On the last day of each month, tie the hash tags out to the monthly taproom “invoice” the owner creates to ensure the appropriate amount of kegs have been transferred. The taproom manager (if there is one) is responsible for reconciling variances.

Once these processes are in place, implement inventory management software to input all this information digitally versus on paper. The key is to initiate operating procedures first to ensure data is being captured accurately and completely before relying on software to complete what was previously done manually.

Physical inventory not taken at end of month
Valuable cash and resources may be squandered due to variances and shortages. If no one is held accountable for the shortages, there is no incentive to improve operations. Inventory could just “walk out.” The brewer may run out of a raw material they may need, which could interrupt operations and cause conflict between coworkers. The brewery cannot improve loss figures if it doesn’t measure them to begin with.

Have a designated individual complete a physical inventory on the last day of each month after operations have concluded or on the first day of the month prior to operations commencing for all inventoried items. Submit count sheets to owner (if that individual is not the owner) to input adjustments into your inventory or financial management system, even if it’s just Excel. Run a variance report and have the owner analyze it on a monthly basis. Hold accountable those in charge of specific responsibilities to investigate and explain inventory variances. Once a high degree of accuracy (counted versus what’s in financial records) is achieved on a monthly basis, consider a transition to cycle counts based on total inventory value.

No inventory for tracking all brewing and packaging processes
If processes are not measured then action plans cannot be instilled on measured losses. Aside from reasons mentioned earlier in this column about lack of inventory tracking, the TTB requires a brewery to maintain inventory and production logs for every stage of the brewing process. A greater amount of detail on the TTB requirements for inventory and record keeping may be found here: https://www.ttb.gov/beer/beer-tutorial.shtml#_Production_and_Inventory. 

Implement inventory management software that overlays on top of your financial management system. Set up bin locations for inventory to instill a rhythm to inventory management and tracking. Some examples of inventory management systems fitting a nano operation include Ekos Brewmaster and VicinityBrew. If the owner is skilled with Excel, he/she could potentially create an inventory management workbook, but this would also require daily journal entries. I’ve created an Excel workbook before for a 5,000 BBL brewery and while the daily entries weren’t difficult to input, the entire task is time-intensive and tedious. Some of my nano clients choose to keep up with their Excel workbook on a daily basis, while others choose to spend their time elsewhere and pay the $200 monthly fee typical of these types of systems. It depends on how you value your time, and whether you have others available to assist.

Lack of a back-up (succession) plan
What happens if a key position abruptly quits or goes missing? This is a glaring deficiency for many nanos due to their size. Brewery operations could abruptly halt, resulting in lost revenue, quality loss in product, and internal fighting.

This high degree of transparency should foster the nano to function with less loss, less uncertainty, and a greater degree of efficiency

Everyone should be cross-trained into at least one other related position. Create a communication plan detailing who does what in case a key role goes missing. Develop a succession plan to keep each other motivated and energized, fueled by growth opportunities. Define each role explicitly in written form. It keeps people accountable. 

On the other hand, if the nano is a one-person operation and serves as a hobby job for the brewing owner, the termination of operations may not be significant and a succession plan may not be applicable.

Kegs not be tagged to account for cooperage losses
Kegs can have a way of disappearing if not accounted for. Treat keg shells as inventory items and include them in your regular inventory counts. If possible, tag them with coded sticker tags or laser etchings and track cooperage in stages: Dirty, clean, filled, and in-market. Assign keg tracking to one specific individual. Reconcile counts on record to physical inventory and be prepared to explain all variances.

Tips should NOT be included in taproom income
If tips are being included, taproom income will be overstated, giving the owner an inappropriate view of operational health for future planning. Since income is being overstated, sales and use tax will be overstated, and this simple fact will lead to decreased profits. 

The nano should follow a similar format as a memorized daily journal entry. The actual journal entry is subject to point-of-sale reporting format. An example of the journal entry as an example follows:

Debit: Cash on hand for cash payments received
Debit: Taproom discounts and refunds
Debit: Undeposited funds for credit card payments received
Debit: Merchant service fees for payment gateway
Credit: Cash on hand for tips paid out 
Credit: Sales and use tax payable 
Credit: Sales taproom beer
Credit: Sales other beverages
Credit: Sales restaurant (or food) – *if applicable* 
Credit: Sales merchandise

Following this journal entry, a daily reconciliation of petty cash should be performed to ensure the cash drawer isn’t being shorted. Cost of Goods Sold categories should be set up in the chart of accounts to match revenue categories in order to monitor gross margins by category. Overhead labor rates should be assigned once margins have been benchmarked.

Sales tax collected should NOT be reported as taproom income
Sales tax collected from a customer is a balance sheet versus income statement transaction. Taxes will be overpaid on the portion of sales tax collected and net income decreased. 

Set up a sales tax payable account in the balance sheet and deposit all sales tax collected into that account. Debit that account on a monthly basis when sales tax is paid. The journal entry follows.

When sales tax is collected from daily sales:

Debit: Cash on hand
Credit: Sales tax payable

When sales tax is paid to the state monthly:
Debit: Sales tax payable
Credit: Cash on hand

Note that the sales accounts are never touched. This format coincides with the previous daily taproom journal entry.

Final Thoughts
The size of your operation should not be an excuse for poor business practices. Each position’s role at the nano should be explicitly defined alongside a clear path of communication. A communication plan should be reviewed on an annual basis. As our industry is highly regulated, ignorance is not an excuse. Make sure you spend enough time with your planning, understand your working capital requirements, and use the data from your systems to make smart business decisions.

Hope is not a strategy.